Course:

LOGISTICS ENGINEERING AND SUPPLY

CHAIN DESIGN

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Vietnam National University HCMC
 Chapter 7
Transportation Design

Lecturer: Dr. Nguyễn Hằng Giang Anh

Email: [email protected]
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 Main Contents

1. Transportation Modes in Supply Chain

2. Transportation network design options

3. Tailored transportation networks in a supply

chain

4. Trade-offs in designing a transportation network

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 1.
TRANSPORTATION MODES AND
THEIR ROLE IN A SUPPLY
CHAIN

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 Modes of Transportation (1/3)

❖ Air
❖ Truck What are differences between TL vs. LTL?
Truck Load: entire fulfill a

❖ Rail
Less-Truck-Load: small demand compared to other, then combine it into 1 truck
then delivery --> have more than 1 categories of goods

❖ Water
❖ Pipeline
❖ Intermodal more than one mode of transport are used to move a shipment to its destination

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 Modes of Transportation (2/3)
Mode of
Characteristics Suitable products
transportation

the most common used when the distance is long but Large, heavy and low-value
Rail it is slow and inflexible shipments over long distances

- Advantage of door-to-door shipment and a shorter Small as well as Large shipment

Road/Truck delivery time
- Disadvantage of weather and traffic problem

The oldest mode of transport, the

Water slowest of all the modes and inflexibility Large and bulky loads at low cost

The newest but least utilized mode very fast Small, high-value items or time-
Air sensitive emergency shipments for a
but fairly expensive mode
long distance

The unique mode which is operated on a

24-hour basis, 7 days per week. Oil, gas and coal together with water. Only
Pipeline
It is cheapest way of moving liquids but carrying large volumes of certain types of fluid
slow and inflexible

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 Modes of Transportation (3/3)

Mode of
Fixed cost Variable cost
transportation

High
Rail Low
(equipment, terminals, tracks)

Low
Medium
Road/Truck (highways in place and provided by public
(fuel, maintenance)
support).

Low
Medium
Water (capability to transport large amount of
(ships and equipment)
tonnage)

High High
Air
(aircraft and handling and cargo systems) (fuel, labor, maintenance)

Highest
Lowest
Pipeline (construction, requirements for control
(no labor cost of any significance)
stations, and pumping capacity).
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 2.
TRANSPORTATION NETWORK
DESIGN OPTIONS

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 Designing a transportation network

Three basic questions need to be considered when designing

a transportation network between two stages of a supply chain:

1. Should transportation be direct or through an

intermediate site?
2. Should the intermediate site stock product or only serve
as a cross docking location?
3. Should each delivery route supply a single destination
or multiple destinations?
Single Destination
Each route
Milk runs (Multi destinations)
Direct
Storage: Store at warehouse for a few days
Middle
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 Transportation Network Design Options

1. Direct Shipment Network to Single Destination

2. Direct Shipping with Milk Runs
3. All Shipments via Intermediate Distribution Center
with Storage
4. All Shipments via Intermediate Transit Point with
Cross Docking
5. Shipping via Distribution Center using Milk Runs
6. Tailored Network

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Direct Shipment Network to Single Destination

Supplier does not need a middle man.

They go directly to customers

❖ This network is justified only if demand at buyer locations is large

enough that optimal replenishment lot sizes are close to a truckload from
each supplier to each location.
❖ Advantage: elimination of intermediate warehouses and its simplicity of
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operation and coordination.
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Direct Shipping with Milk Runs (Joint collection & delivery)

- A supplier delivers directly to

multiple buyer locations on a
truck

- A truck picks up deliveries

destined for the same buyer
location from many suppliers.

Joint delivery Joint delivery

❖ Milk runs make sense when the quantity for each location is too small to
fill a truck but multiple locations are close to each other →Using this
option, managers need to decide on the routing of each milk run.
❖ Advantage: Milk runs lower transportation cost by consolidating shipments
toInternational
multiple locations
University on a single truck.
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All Shipments via Intermediate Distribution Center
with Storage

Product is shipped from supplier to a central DC,

where it s stored until needed by buyers when it is
shipped to each buyer location

❖ This option is justified if transportation economies require large

shipments on the inbound side or shipments on the outbound side
cannot be coordinated.
❖ Advantage: a DC allows a supply chain to achieve economies of scale
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forVietnam
inbound transportation
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All Shipments via Intermediate Transit Point with
Cross Docking

Intermediate
transit point
without storing
products
Suppliers send their shipments to an
intermediate transit point, where they are
cross-docked and sent to buyer locations
without storing them

❖ When a DC cross-docks product, each inbound truck contains product

for several buyer locations, whereas each outbound truck contains
product from several suppliers.
❖ Advantage: little inventory needs to be held and product flows faster in
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the supply
Vietnam chain
National → Cross-docking
University HCMC also saves on handling cost.
 Shipping via DC Using Milk Runs

❖ Milk runs can be used from a DC if lot sizes to be delivered to each

buyer location are small.
❖ Milk runs reduce outbound transportation costs by consolidating
small shipments.
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 Tailored Network

❖ This tailored network is a combination of previous options

that reduces the cost and improves the responsiveness of
the supply chain.
❖ High-demand products may be shipped directly to high-
demand retail outlets, whereas low-demand products to low-
demand retail outlets are consolidated to and from the DC.
❖ The network allows for the selective use of a shipment
method to minimize the transportation as well as
inventory costs.
❖ Operating a tailored network requires significant investment
in information infrastructure to facilitate the coordination.

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Pros and Cons of Different Transportation
Networks

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Example 1: Selecting a Transportation Network (1/4)

A retail chain has eight stores in a region supplied from four

supply sources. Trucks have a capacity of 40,000 units and cost
$1,000 per load plus $100 per delivery. Thus, a truck making two
deliveries charges $1,200. The cost of holding one unit in
inventory at retail for a year is $0.20. The vice president of supply
chain is considering whether to use direct shipping from suppliers
to retail stores or setting up milk runs from suppliers to retail
stores.
→ What network do you recommend if annual sales for each
product at each retail store are 960,000 units? What network do
you recommend if sales for each product at each retail store are
120,000 units?

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Example 1: Selecting a Transportation Network (2/4)

We have:
• Eight stores, four supply sources
• Truck capacity = 40,000 units
• Cost $1,000 per load and $100 per delivery
• Holding cost = $0.20/year
• Two options:
o Direct shipping from suppliers to retail stores.
o Milk runs from suppliers to retail stores.
→ Case 1: If annual sales = 960,000 units and suppliers run milk
runs to two stores on each truck. What network do you
recommend?
→ Case 2: If annual sales = 120,000 units and suppliers run milk
runs to four stores on each truck. What network do you
recommend?
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Example 1: Selecting a Transportation Network (3/4)
When annual sales of each product at each retail store are 960,000 units

Direct shipping Milk runs

Batch size shipped from each

40,000 units 40,000/2 = 20,000 units
supplier to each store

Number of shipments/year from

960,000/40,000 = 24 960,000/20,000 = 48
each supplier to each store

1,000 + 100 =$1,100 1,000/2 + 100 =$600

Transportation cost per shipment
(one store/truck) (two stores/truck)

Annual trucking cost 24 x 1,100 x 4 x 8 = $844,800 48 x 600 x 4 x 8 = $921,600

Average inventory at each store

40,000/2 = 20,000 units 20,000/2 = 10,000 units
for each product
20,000 x 0.2 x 4 x 8 = 10,000 x 0.2 x 4 x 8 =
Annual holding inventory cost
$128,000 $64,000

$844,800 + $128,000 = $921,600 + $64,000 =

Total annual cost University
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$972,800 $985,600
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Example 1: Selecting a Transportation Network (3/4)
When annual sales of each product at each retail store are 120,000 units

Direct shipping Milk runs

Batch size shipped from each

40,000 units 40,000/4 = 10,000 units
supplier to each store

Number of shipments/year from

120,000/40,000 = 3 120,000/10,000 = 12
each supplier to each store

1,000 + 100 =$1,100 1,000/4 + 100 =$350

Transportation cost per shipment
(one store/truck) (four stores/truck)

Annual trucking cost 3 x 1,100 x 4 x 8 = $105,600 12 x 350 x 4 x 8 = $134,400

Average inventory at each store

40,000/2 = 20,000 units 10,000/2 = 5,000 units
for each product

Annual holding inventory cost 20,000 x 0.2 x 4 x 8 = $128,000 5,000 x 0.2 x 4 x 8 = $32,000

$105,600 + $128,000 = $134,400 + $32,000 =

Total annual cost University
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$233,600 $166,400
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 3.
TAILORED TRANSPORTATION
NETWORKS IN A SUPPLY
CHAIN

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 Tailored transportation

❖ Tailored transportation is the use of different transportation

networks based on customer and product characteristics.
❖ Most firms sell a variety of products and serve many
different customer segments → should not design a
common transportation network to meet all needs.
❖ A firm can meet customer needs at a lower cost by using
tailored transportation to provide the appropriate
transportation choice based on customer and product
characteristics.

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 Three forms of Tailored transportation

1. Tailored Transportation by Customer Density and

Distance

2. Tailored Transportation by Size of Customer

3. Tailored Transportation by Product Demand and

Value

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Tailored Transportation by Customer Density
and Distance

❖ Firms must consider customer density and distance from

warehouse when designing transportation networks.

❖ Ex: When a firm serves a high density of customers close

to the DC → the firm should own a fleet of trucks that are
used with milk runs originating at the DC to supply
customers.
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 Tailored Transportation by Size of Customer

❖ Firms must consider customer size (in terms of quantity

purchased) and location when designing transportation
networks.
❖ Large customers can be supplied using …,
whereas smaller customers will require …

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Tailored Transportation by Product Demand and
Value

❖ The degree of inventory aggregation and the modes of

transportation vary with the demand and value of a product

❖ The cycle inventory for high-value products with high demand

is disaggregated to save on transportation costs.
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